Wendy’s works to maintain premium value

NEW YORK — It has been a busy few years for the Wendy’s Co., Dublin, Ohio. In that time frame the company has merged with Arby’s and then, in 2011, it sold Arby’s to a private equity group. Then, in November 2011, the company introduced Emil Brolick, formerly of Yum! Brands, as its new chief executive officer. Since Mr. Brolick’s hiring the Wendy’s has been working to improve its market position in the quick-service restaurant category.

“We are still underpenetrated in the U.S. compared to, say, a McDonald's or a Burger King, so there's opportunity to grow in the U.S.,” said Steve Hare, senior vice-president and chief financial officer, during the Wedbush Securities California Dreamin’ Consumer Management Access Conference on Dec. 12.

In the United States, Mr. Hare said Wendy’s is facing two types of competitors, the major Q.S.R. brands like McDonald’s and Burger King, but also niche players that are focusing on the premium portion of the Q.S.R. space.

“What that’s really referring to is, when we talk about new Q.S.R., we talk about people like Five Guys, who have come into our space and are taking some of our premium customers,” he said. “But also people like Panera Bread or Chipotle that are providing a different, more contemporary customer experience, that we need to compete with.

“Our way to compete with that is to provide a very similar quality product, but at a much lower price, one that is consistent with Q.S.R. pricing.

“So, for example, Five Guys, I think if you compare the two products side-by-side with the Dave’s Hot & Juicy, which we launched in the fourth quarter a year ago, I think you’ll find the quality to be quite comparable. However, our price point is going to be about 40% less, and also available, obviously, through the convenience of a drive-through.”

Mr. Hare cited food innovation as one reason Wendy’s has been able to produce six consecutive months of positive same-store sales while at the same time experiencing a decline in customer traffic.

“The fact is that if you look across our menu, we think we have significantly improved our hamburger offering, our premium chicken offerings, as well as our salad program,” he said. “We are actually the leader in terms of salads in the fast-food space. We sell more salads than a Panera Bread.”

During the third quarter of fiscal 2012, ended Sept. 30, Wendy’s experienced 2.7% sales growth and improved margins at the restaurant level, Mr. Hare said. The company also experienced a loss of $26.7 million due to a pre-tax charge related to the retirement of debt.

“A lot of that is based on the strength of some very attractive premium offerings we had during the third quarter,” he said.

Items he identified as being particularly successful were the introduction of an extension to the company’s Baconator line, the Son of Baconator, as well as a spicy chicken sandwich and an asiago ranch chicken club sandwich.

But competition in the Q.S.R. space, particularly increased innovation and discounting activities by most players, remains a concern for Wendy’s. Calling McDonald’s a “constant pressure,” Mr. Hare said the Oak Brook, Ill.-based market leader has been recently aggressive in the value segment, but added that they are “always aggressive.”

“Burger King is a bit of a wild card,” he said. “They certainly are reacting very strongly under new ownership and I think they’ll get back into the game. They’re taking a very different approach to us. I think if you look at their new product introductions, to me, (they are) strikingly very similar to the McDonald’s product menu, and sort of at a — what we think is a different place in the marketplace than a cut above.”

Despite the company’s focus on premium offerings, Mr. Hare said Wendy’s would like 15% of its sales to be on the value side of the equation.

“I will say that one of the areas where we’ve been inconsistent, and I think one of the reasons for the slight decline in traffic this year, is we’ve been more effective on the premium side than on the value side,” he said. “So, one of the programs we have for 2013, that I think is very promising based on tests, is what we call ‘Right Price, Right Size,’ where we work with the franchisees, try to come up with our core menu items, 99c priced items that everybody sticks with; but then also gravitates to higher prices up to, say, $2, that helps let people also consistently present what we think is good value, either for signature items that you can’t get other places — like a Wendy's chili or baked potato — but also some products that are protein-oriented.

“With beef prices as high as they are, it’s very difficult for our franchisees to rationalize selling a double cheeseburger at a 99c price point. But we still think it's a good value for customers if they come in and they’re paying $1.49 or $1.79, depending on the market they’re in. We think that is a good response for us from a value standpoint, and hopes that helps us capture some of the discount traffic that’s out there.”